F5 Networks (FFIV), a once-and-future momentum favorite, plunges with the rest of the tech sector

F5 Networks (FFIV) took it on the chin again today, falling another 7.9% on the day, to close at $108.56. The stock is now down a little more than 20% from the close on May 3.

Today’s damage was spill over, I think, from bad news from NetApp (NTAP), Hewlett-Packard (HPQ), and Dell (DELL) on weak information technology spending. After its earnings report yesterday for the quarter that ended on April 27, NetApp lowered its guidance for the first quarter of its fiscal year to $1.4 billion to $1.5 billion in revenue versus the $1.6 billion consensus. That seemed to confirm the weakness that Dell reported that same day. Dell missed earnings forecasts for the first quarter and then issued downside guidance for the second quarter on both revenue and earnings. Hewlett-Packard made it three-strikes for the tech sector when it announced that while it had come in above Wall Street earnings estimates for its fiscal second quarter, revenues had declined 3% from the second quarter of fiscal 2011 and that earnings for the fiscal third quarter would be 94 cents to 97 cents, below the Wall Street consensus of $1.02.

I’d just note for anyone interested in buying shares of F5 Networks, a stock that on its history I think you should expect to soar if this market ever decides to rally, that analysts seem to have just begun to cut their target prices. Read more

Analysts upped their target prices for ASML Holding (ASML), Europe’s biggest semiconductor equipment maker, after the company reported first quarter earnings of 68 cents a share (2 cents above consensus projections) on April 18.

Trouble is, in my opinion, that the new higher targets are for just $55 a share or so and with the stock trading at $50.05 today at 1:15 p.m. New York time I don’t think that’s enough of an upside given the uncertainties in equipment orders from ASML’s biggest customers in the coming quarters. ASML Holding is a member of my Jubak’s’ Picks 12-18 month portfolio http://jubakam.com/portfolios/ . I’ll be selling the shares out of that portfolio today with a 39.4% gain since I added it to the portfolio on April 20, 2010.

You should think of ASML shares as victims of their own success. The stock was up 23.6% for 2012 as of the close on April 27. And ASML shares are up 42% since the $35.85 low on November 25, 2011. And on April 19 the stock hit a 12-year high.

(Please note that ASML is scheduled to pay a dividend of 0.46 euros a share (roughly 60 cents) on May 15 to shareholders of record on May 2. If you sell today, you will still get the dividend.)

It’s not that ASML had bad things to say about the rest of 2012. In fact the company raised its revenue guidance for second quarter.

But the company didn’t give guidance for second quarter earnings on April 18 and I think that reflects a problem for holders of ASML. Because of a steady consolidation in the number of companies making chips—more companies (Apple and Qualcomm to name two) contract their chip making to fewer and fewer big fabs run by the likes of Samsung and Taiwan Semiconductor Manufacturing (TSM). That means the equipment orders to companies like ASML are bigger and lumpier. Taiwan Semiconductor recently increased its capital budget for 2012 to $8 billion to $8.5 billion from $6 billion. That’s certainly good news for companies such as ASML, KLA Tencor (KLAC), or Lam Research (LAM). But given recent news on component shortages from chip consumers such as Apple (AAPL) and Qualcomm (QCOM), it’s also clear that the exact rate of ramp up for new manufacturing lines is uncertain. Working backward that suggests that the exact timing of orders to equipment makers may be uncertain too.

I don’t doubt the reality of the increase in capital spending from chip manufacturers that the sector is seeing. I just worry about the danger of a big order slipping from one quarter to another. That would clobber the shares of a company like ASML or Lam Research and at the current price for ASML shares I just don’t think investors have enough potential reward to take that risk.

I’m much rather revisit this stock in August or September when, even if shares haven’t pulled back in price, we’re likely to have more visibility on 2012 orders. And that would lower the risk in the shares.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , may or may not now own positions in any stock mentioned in this post. The fund did own shares of ASML Holding as of the end of December. For a full list of the stocks in the fund as of the end of December see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/

What price Apple (AAPL)?

For the short-term I think the options market is a better guide than the fundamentals in Apple’s March quarter earnings report of April 24.  After falling by 12% in the run up to earnings—from $636 on April 9 to $560 on April 24—the stock climbed 9% on April 25, $50 a share. No way that kind of volatility is a result of earnings fears and then earnings news (even with a $2.26 a share positive surprise) unless the news was magnified by big bets in the options market on Apple.

All the evidence points says that traders who had placed bearish bets using options that the stock would fall further on earnings got caught on the wrong side of that bet when Apple issued its positive surprise. Their scramble to close that trade—by buying shares or options on the other side of the trade—certainly provided a big part of the $50 a share jump on Wednesday. (Trading volumes in Apple option contracts hit 1.35 million on April 25, up from 1.26 million contracts the day before.)

What’s the options market telling us now about the short-term bet on Apple? Read more

Buy Digital Realty Trust (DLR)

On my March 16 post http://jubakpicks.com/2012/03/16/yes-the-nasdaq-is-higher-than-its-been-since-the-tech-bust-of-2000-but-this-is-a-different-and-much-healthier-technology-sector/on investing in the technology sector—even after it has rallied so strongly at the beginning of 2012—I said don’t forget about companies that enable bigger technology trends and mentioned very briefly Digital Realty Trust (DLR) a company that owns a portfolio of 102 data centers in 31 markets serving clients that include Facebook, AT&T (T), and Morgan Stanley (MS). Organized as a REIT (real estate investment trust), I noted, Digital Realty pays a 3.8% dividend.

Let me dig a little further into this REIT because I think it’s a very interesting way to get some technology exposure for even a risk-averse portfolio.

The company makes its money from leasing space in its data centers on anything from a turn-key basis to build-to-suit to operations that range from a company’s computing center to a telecommunications network to an Internet enterprise such as Amazon.com or Salesforce.com. The bulk of its business (90%) comes from North America but Digital Realty Trust has been building out its capacity in Europe (Dublin, Paris, and London), Singapore, and Australia.

A typical deal might work start with Digital Realty buying a building from a technology company looking to lower its debt load by getting paid to convert an owned asset into a lease. Digital Realty then installs the basic infrastructure in the building, but passes on the cost of things such as fully redundant electric systems to tenants. That helps lock in clients—the company saw a 92% retention rate in 2011. On average tenants sign a lease for 14 years with built in 3% increases in annual rent. Tenants also pay for maintenance, real estate taxes, and insurance.

Even though it’s selling facility management and space to technology companies instead of apartments or retail space, Digital Realty works like a standard REIT. Read more

The NASDAQ Composite Index broke 3,000 on Tuesday, March 14, for the first time since 2000. The 11-year high for the index brings back memories of those days in 2000 when the dot.com bubble pushed the technology-laden index to a high of 5,048.62. (The 500 or so technology stocks that trade on the NASDAQ market account for almost 50% of the market-capitalization weighted index.)

But breaking the 3,000 level isn’t either a signal to put the champagne on ice so it will be chilled when it’s time to celebrate the NASDAQ hitting 5,000 or to run in fear yelling “The sky is falling again.”

Truth is, this isn’t your father’s technology sector. We’re not headed to the moon or into the abyss. Which is why even at 3,000 this is a good time to invest in technology stocks. As long as you understand the big differences between the current technology market and that of 2000.

I can think of four major differences. Read more